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WIKI ANALYSIS
The Unum Group provides individual and group income-protection insurance. Unum also offers long-term care insurance, group benefits, and life insurance. It is the largest domestic disability insurer in the United States, with the majority of premiums coming from employer insurance plans.
Business Overview
Headquartered in Chattanooga, Tennessee, Unum Group (UNM) was created following the June 1999 merger of Provident Companies, Inc. and Unum Corporation. Along with disability insurance, the company provides long-term care insurance, life insurance, employer- and employee-paid group benefits, and related services. Since January 2003, UnumProvident has been classifying its operations into five segments: Income Protection, Life and Accident, Colonial, Corporate, and Other. Effective July 1, 2005, the company modified its reporting segments to separate its United States business from its United Kingdom subsidiary, Unum Limited. On January 16, 2007, the company stated its intention to change (for broadening branding initiatives) its name to Unum Group from UnumProvident Corporation, after obtaining the necessary legal approvals (effective March 2, 2007). In the intervening time, the company will use its new operating segment names U.S. Brokerage will be called Unum US, and Unum Limited (the U.K. business) will be called Unum UK. The company's business operations are now segmented as follows:
The Unum Group provides a wide variety of insurance products. It is the largest provider of group disability insurance in the United States, and it also provides other insurance products such as income-protection, life, long-term care, and corporate-oriented group insurance. Unum also provides services in the United Kingdom through Unum U.K.
Unum’s insurance products are usually sold through insurance brokers. Unum is also trying to shift its focus on small and medium-sized group plans.
Group Disability
Its group disability products accounted for 47.5% of its American premiums for 2007. Due to the risk involved in insuring large groups, Unum has set underwriting procedures. If a particular individual in the group does not meet its general requirements,the insurance purchaser must provide proof of that individual’s insurability. Unum attracts new customers by offering one to three-year rate guarantees on its policies, although policyholders wishing to renew typically receive a one-year rate guarantee. Unum pays special attention to its obligations for these products as they are especially susceptible to economic recessions. Policies for larger groups tend to have smaller profit margins and less risk than those to smaller groups since large policyholders can usually weather a certain amount of economic turmoil.
Group Life and Accidental Death
Unum’s group life and accidental death products account for 24.7% of its American premiums for 2007. Unum works with companies to sell these products as employee benefits. Its accidental death product mainly covers travel accidents, and its life insurance product is typically linked to employees’ wages.
Other products
Individual disability accounts for 9.1% of it American premiums for 2007. Policyholders may receive a certain percentage of their monthly income if they are sick or injured. These policies may be custom-tailored to include temporary transfer of ownership in a business and payment for business overhead expense. The rates are determined, amongst other things, by age, gender, and occupation.
Group and individual long-term care accounts for 10.6% of its American premiums for 2007. Insurance is provided if the policyholder is unable to perform a certain number of daily functions, such as eating, bathing, or dressing, or is cognitively impaired. Policyholders become eligible for payments after two days of being unable to perform these tasks. Due to the potentially large payouts, Unum carefully evaluates the medical condition of each prospective client.
Voluntary benefits accounted for 8.1% of its American premiums for 2007. Voluntary benefits include universal life, individual disability, and critical illness and cancer products. Unum typically sells these products to groups through payroll deduction. Since participation in these benefits is voluntary, profitability is largely influenced by employee participation and persistence.
Investments
Like most insurance companies, Unum invests a certain percentage of its premiums. Its profitability is dependent on its investments since investment returns are used to keep its policy rates competitive. Unum’s investments are focused on relatively liquid assets, and they try to match cash inflows from investments to anticipated cash outflows from policy payouts.
Credit ratings also play a central role in Unum’s business as it establishes the level of confidence credit agencies have in its ability to meet debt and policy obligations. While its overall financial health is good, its credit ratings are more varied, ranging from good to speculative. This means that Unum must pay a higher premium for the debt it issues, although the company has begun to reduce its long-term debt in order to address this problem.
Profitability
Unum has been focusing on maintaining profitability after ending with negative net incomes for the years ending 2003 and 2004. Since then, it has strengthened its operating income despite keeping its premiums and investment income relatively steady.
Unum faced problems in 2003 for issuing large insurance policies at very low prices. These policies lowered underwriting profits, and later lawsuits claimed that Unum denied claims in order to reduce expenses. After taking on additional debt in 2005 to settle these claims and reorganize certain aspects of its underwriting business, Unum has been lowering its long-term debt since.
Trends and Forces
- Miscalculating the reserve requirement under generally accepted accounting principles could harm its earnings. Since the reserves are set apart using expected liability payments, if actual payments exceed expected payments, then current earnings will be overstated and the excess amount will be deducted from current earnings. Likewise, if the opposite occurs, then current earnings will be understated.
- An unexpected rise in the number of claims could severely weaken Unum’s financial position. Epidemics, terrorist attacks, natural disasters, and other events of similar magnitude could result in a rise in claims that Unum could be unprepared for financially. Certain risks, such as that of terrorism, cannot be diversified away. For other events, such as natural disasters, the claim number can be influenced by government policy and government preparedness.
- Problems with the economy might lower Unum’s return on investments. Unum, like most other insurance companies, invests a percentage of the premiums it collects. Unum invests a large portion of it in fixed-income securities. Fluctuations in the economy, accounting fraud, and problems with cash flows could affect the fixed-income securities market, which in turn affect Unum’s portfolio yield.
- Governmental regulations across countries may affect Unum’s financial health. Unum does business in the United States and the United Kingdom. A change in insurance laws in any of them could affect Unum’s cash flow. In the United States, Unum must conform to Federal, state, and local laws regarding insurance. An increase in the reserve requirement would weaken its earnings. In the United Kingdom, the Financial Services Authority has the ability to bar Unum from conducting business if it fails a regulatory guideline.
References
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